Hamish McRae: Dealing with China will never be easy

I also detect a sense of moral superiority in the Chinese attitude towards us now
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The Independent Online

They do things differently in China. As the four Rio Tinto executives have found to their cost, the fact that corruption is endemic in China does not mean that foreigners who transgress get a free pass. Indeed it is because corruption is so evident that it suits the authorities to have periodic high-profile cases to try to counter it. So the case was, as in Voltaire's Candide, "pour encourager les autres".

There may be further objectives. The former mayor of Shanghai, Chen Liangyu, the man credited with choreographing the city's economic renaissance, is currently serving an 18-year sentence for corruption in what many saw as a politically motivated move. So all foreign companies operating in China should take heed of what has happened, as of course they will.

However, this particular case exposes just one of many difficulties the West has and will have in dealing with the world's new great commercial power. Multinational companies have long been aware of the political risks of operating in different jurisdictions around the world. They have had their assets nationalised, their executives under house arrest and, worse, their bank balances frozen.

There are in essence three issues: what Western companies can and should do in China; what Chinese companies will increasingly do in the West; and the extent to which Chinese commercial values and practices come to influence the entire economic space.

In reality, the first is easy. Western companies have a simple choice with China, just as they have a choice in other non-national jurisdictions. They can operate there and accept the political, legal and other risks. Or they can judge that the risks involved and the potential damage these might do to their other business elsewhere in the world does not justify operating there. In that sense there is no difference between operating in China, India, Russia, Brazil, Nigeria or any of the emerging nations.

A more complicated issue will come as Chinese corporations increasingly operate in the West. As the Rio Tinto executives were standing trial, China was completing its highest-profile acquisition of a European company, Geely's purchase of Volvo. Geely is also in the process of buying a controlling interest in Manganese Bronze, builder of the iconic London cab, but this is a tiny investment by comparison.

Up to now the principal ways in which the booming Chinese economies have impacted on the world economy has been in flooding the world with cheap produce and scooping up raw materials and energy supplies. The next natural progression is to own Western companies. This process has just begun.

I suppose the key question here is whether Chinese ownership should be any different from American, German, French, Japanese or Indian ownership. Take cars. Objectively American ownership of the British motor industry has been a mixed bag, as indeed has German. But Japanese investment has been hugely successful and while it is early days yet, Tata's acquisition of Jaguar and Land Rover bodes well.

But the potential impact of China is different from that of all other inward investors. Roughly half the world's savings are now being accumulated there. The result will be a flood of investment across the world. This has already happened in Africa, where China is putting in more infrastructure than the whole of the Western nations combined. It has already happened in investment in US government assets, where China is the largest single investor. And it will happen in Europe and here. That is why the Geely purchase of Volvo will be crucial.

Here it is important to say that the public statements by the group's chairman, Li Shufu, have been most positive. He has committed the company to maintaining production in Sweden, rather than seeking to shift it to China.

"Volvo comes from Northern Europe and is rooted in Sweden," he said. "Volvo will not be Volvo any more if taken out of the soil. Relations between Geely and Volvo in the future will be like brothers, not father and son."

But the harsh reality of global commerce is that Volvo has to make money, as does Rover, as does Jaguar, as indeed does Manganese Bronze. The test of Geely's ownership will be whether Mr Li can bring a management focus that Volvo's present owners, Ford, have failed to do.

If it works, other Chinese entrepreneurs will want to test their ability to turn round Western companies. Most of us in the UK would surely welcome this – if other people can be better custodians of our brands than we can, they should have a crack at it. But it would be naïve to think that it will be easy for us here in Britain or Europe to accept the shift of power involved. It reminds us of our diminished role in the world.

That leads to the most difficult issue of all: the extent to which we in the West are losing intellectual and social influence as well as economic influence. Five years ago the Western financial model was seen setting the broad outlines of China's future economic development. It would be a mixed economy. State-owned companies would be privatised. Stock markets would grow. Banks would move from the command-and-control system – being told how much to lend – to a market system. Central direction of investment, necessary now, would gradually diminish. Something akin to a Western legal system would be encouraged.

Now, that sense that China would inevitably and necessarily move towards us does not really hold any longer. The recession has not helped. Why should China adopt a model that has delivered what will for most countries become the worse recession since the Second World War, when its own model has delivered continued rapid growth? But I also detect a sense of moral superiority. It is not just that individually Chinese people work harder and save more. As a country China runs its national finances in a responsible way, rather than loading the burden of debt on to future generations.

And as for the charge of China being a corrupt society, after this Rio Tinto business, who are the guilty now? Looking at the mess we have made of our own national finances and our indebted families, it is hard to be quite so confident of our values as we were a while back, and that loss of self-confidence has been noted.

h.mcrae@independent.co.uk

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